It was a Legal Party in Nashville

We attended the International Legal Technology Association’s annual conference in Nashville a few weeks ago.  It was evident the industry is thriving and companies are in a race to grab market share.  We met with executives of companies across the industry value chain, from document management software to e-discovery to management consulting.  The industry is celebrating the good times and people were in great spirits.  Almost every one we spoke with is experiencing increased demand from both corporate legal departments and law firms.  The conference confirmed our view – most segments within the legal technology and services industry remain highly fragmented and are prime for consolidation.  We believe M&A activity in this market is just bubbling and expect it to boil over in 2015 and 2016.  Here are a few M&A trends we predict for the industry:

•  LPO Providers Acquire Small Technology Companies – LPO providers will pursue tuck-in acquisitions of software businesses that offer tools to drive efficiency and improve quality (i.e. workflow and document management tools).  If executed properly, this strategy will no doubt separate these companies from the pack of “me toos” and increase the stickiness of their services.
• E-Discovery Consolidation – This segment is one of the most, if not the most fragmented, parts of the legal technology and services industry.  There are companies that purely focus on developing technology, some that leverage a third-party platform to offer eDiscovery services, and some that use their own proprietary technology to offer a complete solution.  Based on discussions with users, we believe companies that offer a complete solution on top of a proprietary platform have a competitive advantage since they can be more flexible.  We expect most M&A activity in this segment will involve solution providers with a proprietary platform acquiring companies that provide access to new customers rather than chasing targets for their technology.
• Robust Transaction Valuation Multiples – The legal technology and services industry is still relatively untapped and highly fragmented, which provides highly attractive growth opportunities.  The combination of healthy industry growth and ample liquidity, for both strategic acquirers and financial sponsors, will sustain a favorable M&A market for sellers for the foreseeable future.  We recommend buyers move quickly before highly desired targets are snatched up.